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Monthly Archives: March 2016

You can learn a lot about payday lending from the story of Scott Tucker, the race car driver who stands accused, along with his attorney, of bilking 4.5 million people out of a combined $2 billion.

Their criminal indictment, announced by the U.S. Attorney’s Office for the Southern District of New York, grew out of an investigation launched by the Federal Trade Commission in 2012. Hundreds of pages of court documents from that inquiry have now been unsealed, thanks to a lawsuit filed by Public Justice on behalf of Americans for Financial Reform. As a result, we know a great deal about how Tucker’s operation worked.

People who borrowed money from his companies, which had names like Ameriloan, OneClickCash and USFastCash, were led to believe they would be responsible for repaying the principal plus a one-time finance charge of 30 percent. But as the FTC alleged and a federal court in Nevada subsequently agreed, borrowers got routed onto a much costlier path once they had signed over access to their bank accounts.

Technically, there were three repayment options. That fact, however – along with the procedure for choosing one over another – was buried in a tangle of tiny hyperlinks and check-boxes on the company’s website. And customer service representatives were explicitly told not to explain any of this clearly.

Nearly all borrowers, like it or not, were defaulted into the so-called renewal option, which began with a series of “renewal fees” costing 30 percent of the original amount borrowed. With each fee payment, borrowers would incur another renewal fee of 30 percent of the principal. Four payments later, they would wake up to discover that they had paid back 120 percent of the original amount – without putting a dent in the balance.By these means, someone who had taken out a $500 loan would end up making nearly $2,000 in payments!

The unsealed documents include transcripts of angry phone calls in which borrowers either refused to continue paying or said they couldn’t afford to do so. Tucker’s companies responded, as the transcripts show, with a variety of illegal loan collection practices, including warnings that nonpayment could lead to arrest.

Unsurprisingly, there were many complaints and at least a few investigations at the state level. For years, however, Tucker’s companies successfully hid behind an assertion of tribal sovereignty based on their false claim to have turned over ownership and management powers to tribal governments in Oklahoma. Courts in several states with strong usury laws dismissed enforcement actions against Tucker’s companies based on the sham tribal-sovereignty claim. In fact, the documents reveal, the tribes received only a tiny portion of the companies’ revenues for letting Tucker make use of their sovereignty, while Tucker kept close reins on the lending capital, staff and management.

Some aspects of the case were particular to Tucker’s companies. It is certainly not every payday lender who uses the money made by fleecing people to finance a sportscar racing career. But in much of what Tucker is alleged to have done, he was drawing on the basic payday industry playbook of loanshark-style fees and rates, bait-and-switch marketing, automatic bank withdrawals and convoluted schemes to avoid state laws.

The standard payday loan is marketed as a one-time quick fix for those facing a cash crunch. But the typical borrower ends up in a very long series of loans – 10 on average – incurring extra fees each time out. Car-title and payday installment lenders play variations on the same theme: A high proportion of their customers remain on the hook for months or even years, making payment after payment without significantly diminishing the principal. And these are the borrowers who make the loans profitable: We are talking about an industry, in other words, whose business model is to trap people in a cycle of debt.

Tucker has been put out of business – that is one big thing that sets him apart. Thanks to the efforts of the FTC and the Department of Justice, with investigative assistance from the IRS and the FBI, he faces fraud and racketeering charges carrying penalties as long as 20 years in prison.

The industry as a whole, however, is going strong across much of the country. Although these loans are prohibited or highly restricted in about a third of states, there are more payday lending storefronts in the U.S. than Starbucks and McDonalds combined. Triple-digit-interest consumer lenders are a particularly big presence in low-income communities and communities of color – communities still reeling, in many cases, from the financial crisis and aftereffects of a wave of high-cost, booby-trapped mortgage loans.

But the problem is not a hopeless one. The Consumer Financial Protection Bureau, the agency conceived by Sen. Elizabeth Warren and created by the Dodd-Frank reforms of 2010, has already drafted and begun to implement rules to guard against a resurgence of deceptive and unsustainable mortgage lending. Now it is working on rules to rein in the abusive practices of payday, car-title and payday installment lending.

The key principle should be the same: Small-dollar consumer lenders, like mortgage lenders, should be required to issue sound and straightforward loans that people can afford to repay.

Across party lines, Americans support that simple concept. By insisting on a strong ability-to-repay standard, the Consumer Financial Protection Bureau can help bring an end to a quarter-century-long wave of debt-trap.

For well over a year, lawmakers, law enforcement, advocates and scammed students alike have been pressuring the Department of Education to relieve the staggering debt of students who attended for-profit colleges like Corinthian which broke the law. In response, the Department convened a negotiated rulemaking session to clarify what the process would be going forward for students who were victims of illegal acts by their school, and wanted to assert their legal right to a “defense to repayment,” or debt cancellation.

But as outlined in a letter delivered this week and signed by 34 organizations, the Department’s draft of the proposed regulations has moved in the wrong direction. Among the worst items of their proposal is a requirement that defrauded borrowers seek debt cancellation within two years — or lose eligibility. This is particularly troubling because there is no limit on the number of years the government can collect on the student debt.

There’s been a lot of talk in Washington lately about regulatory “reform.” Some of that talk is beginning to focus on what Senator Elizabeth Warren (D-Mass.) has identified as the key problem: a playing field badly tilted in favor of big banks and other corporate players.

A number of advocacy groups have joined forces to mount a campaign called Presidential Appointments Matter. “Who a President nominates to senior financial policy and financial regulatory posts – Treasury Secretary, Attorney General, leaders of financial oversight agencies – makes all the difference in what policies we end up with, and whether our economy works for most people,” says Lisa Donner, executive director of Americans for Financial Reform. “Our next President should make demonstrated willingness to stand up to Wall Street power in order to protect the public interest a bottom line criteria for these positions.”

Efforts are also underway to address the conflicts of interest that can make government agencies reluctant to challenge deceptive or unethical industry practices. Senators Tammy Baldwin (D-Wis.) and Rep. Elijah Cummings (D-Md.) have introduced the Financial Services Conflict of Interest Act, which would ban so-called “golden parachute” payments to bank alumni who accept government jobs, in addition to taking other steps to slow the revolving door between Wall Street and Washington. The Federal Reserve Independence Act, backed by Senators Bernie Sanders (I-Vt.) Barbara Boxer (D-Calif.) and Mark Begich (D-Alaska), would prohibit bank executives from serving as directors of the 12 Federal Reserve banks.

Such measures are needed to counter Wall Street’s ability to spend massive amounts of money on litigation, lobbying, and the forging of political connections. The financial industry uses those connections both to shape individual rules and, over time, to sap the will of regulators to act forcefully. “I talk with agency heads who are like beaten dogs — just trying to keep their heads down,” Senator Warren said in her speech to a Capitol Hill symposium on the phenomenon of regulatory capture. As a result, she added, “the rulemaking process often becomes the place where strong, clear laws go to die.”

While some lawmakers are looking for ways to bolster the independence and effectiveness of financial regulators, others – a worrisome number – are pushing a very different brand of regulatory reform: one intended to make it easier for large financial companies to bend the rules to their liking.

In January, AFR and People’s Action organized an online petition urging Senators to reject a bill to curb the political independence of the Consumer Financial Protection Bureau and other oversight agencies. In a joint letter earlier this week, AFR and eight partner organizations voiced their opposition to the so-called TAILOR (Taking Account of Institutions with Low Operation Risk) Act, the latest in a succession of proposals to hamstring regulators by requiring them to perform burdensome and redundant “cost benefit” studies of the impact of (in this case) past as well as future rules.

Regulators need to listen to all sides, but, as Senator Warren went on to say, “bludgeoning agencies into submission undercuts the public interest. The goal should be to have a system where influence over new rules is measured not by the size of the bankroll, but by the strength of the argument.”

The complete text of her speech, in which she laid out four key principles of reform, can be found here.

Last week, some members of the House Financial Services Committee lavished praise on a piece of legislation they said would “restore due process rights to all Americans.”

“All the bill says is that if somebody wants their day in court, they should have their day in court,” the bill’s sponsor, Rep. Scott Garrett (R-N.J.), explained, adding that “preserving the rights of Americans to defend themselves in a fair and impartial trial…is one of the most fundamental rights, and it is enshrined in our Constitution.”

Representative Jeb Hensarling (R-Texas), Chair of the committee, championed the measure as well. “Every American deserves to be treated with due process,” Rep. Hensarling declared. “They ought to have the opportunity to have a trial by jury. They ought to be able to engage in full discovery. They ought to be subject to the rules of evidence.”

A listener might have thought these legislators were standing up against forced arbitration – “rip-off clauses” that big companies bury in the fine print of contracts to prevent people from suing them, even if they have broken the law.

Astoundingly and unfortunately, the legislators were actually moving in the opposite direction. They were extolling HR 3798, the so-called “Due Process Restoration Act,” which would extend special legal protections to Wall Street banks and other financial firms charged with violating federal securities law by the Securities and Exchange Commission (SEC).

This piece of legislation does nothing to restore due process to ripped-off consumers and investors. Instead, the “Due Process Restoration Act” makes it harder for the SEC to hold corporate wrongdoers accountable when they break the law.

Big banks and others charged in SEC hearings already possess several crucial legal protections that their investors and consumers lack in forced arbitration: robust opportunity for discovery, a public hearing, a trained adjudicator bound to make a ruling based in law, and – crucially – the right to two full appeal processes, including a review in federal court. Yet HR 3798 would make it harder for the SEC to prove its case and allow the accused party to unilaterally terminate the proceedings, forcing the SEC to either drop the charges or refile in federal court.

According to Professor Joseph Carcello of the University of Tennessee, giving companies this right to “choose the venue is unlikely to be in the best interest of society, and will almost certainly make it more difficult for the SEC to deter and punish securities law violations, including fraud.” Professor Carcello further emphasized that if fairness is a concern for members of the committee, then it is more unfair for citizens to be forced into arbitration in their contracts with financial institutions.

An amendment offered by Reps. Keith Ellison (D-Minn.) and Stephen Lynch (D-Mass.) threw the gap between the words and actions of HR 3798’s supporters into particularly stark relief. The amendment would have ensured that firms using forced arbitration against consumers and investors could not benefit from the bill’s special protections. Yet, in a display of staggering hypocrisy, this commonsense amendment was defeated on party lines.

Despite grandiose claims of due process, HR 3798 would only further tilt the playing field in favor of special corporate interests when it comes to battling financial fraud and corporate rip-offs. If lawmakers truly wish to “restore due process rights to all Americans,” they should pass legislation to ban forced arbitration and support the upcoming Consumer Financial Protection Bureau rulemaking on this abusive practice.

Wall Street firms and brokers accused of breaking federal law do not need special legal protections, but the right of ordinary Americans to have their day in court very much does need defending. Lawmakers should legislate accordingly.

Yesterday in the House Financial Services Committee, a new bill was considered that would weaken a key piece of financial reform. Speaking in support of the bill, Rep. Steve Stivers (R-OH) argued that this new piece of regulation was important because of “delicious cheeseburgers.”

H.R. 4166, the “Expanding Proven Financing for American Employers Act,” would create new exemptions from the rules in Dodd-Frank that require the financiers packing up new securities to retain a stake in their new products – rules put there to ensure that they have skin in the game.

The bill would allow financial firms that package up a product known as a “collateralized loan obligation,” or CLO for short, to escape the requirement that they hold onto a piece of the CLOs risk – a requirement to hold 5% of the total risk of the CLO, to be exact.

“I’m baffled by legislation such as this…the 2008 crisis was caused – in large part – by mortgage companies that originated loans to borrowers that had no ability to repay…To address this problematic “originate to distribute” model, Dodd-Frank included an important component known as risk retention, or “skin-in-the-game.” In essence, Congress told loan originators and securitizers to “eat their own cooking” before selling off their investments to others…H.R. 4166, takes us in the wrong direction, essentially exempting most securitizations of corporate loans from risk retention.

…CLOs are often used to finance private equity takeovers of companies through “leveraged buyouts.” The industry advocated for the exemption contemplated in this bill when they wrote letters to the regulators during the comment period.

Regulators heard their arguments, and rejected their proposal. In fact, regulators pointed out that the leveraged loan market may be getting overheated, and that “characteristics of the leveraged loan market pose potential systemic risks similar to those observed in the residential mortgage market.” …Mr. Chairman, when our banking regulators tell us there may be a bubble, I think we ought to listen.”

“Wendy’s International, a delicious food company based in my district…they have $246 million of collateralized loan obligations. Without that, they would not be able to make the delicious cheeseburgers you rely on every day.”

What Rep. Stivers doesn’t mention is that the reason Wendy’s needs so much borrowing, and is apparently pushing for weaker rules – and the reason they are already so leveraged that they wouldn’t qualify for the exemption for responsibly underwritten loans that regulators have already granted – is that they are doing a massive stock buyback which cashes out their shareholders. Although the buyback benefits current shareholders, it comes at the expense of leveraging up the company massively and threatening the future of franchisees. In other words, this borrowing isn’t for hamburgers, it’s to make billionaire shareholder Nelson Peltz richer to the tune of hundreds of millions of dollars.

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This blog is maintained by AFR as a forum for ongoing news and commentary about the fight for effective financial reform. Blog posts represent the opinions of their authors / posters, and do not necessarily represent the views of the AFR coalition or coalition members.